Just as children learn from good financial examples, they can pick up disastrous habits
A fortnight ago I looked at the financial lessons learned from our mistakes. My son had been devastated when his wallet was stolen.
During the week I received a letter from a reader containing $10 in cash for my son and some sage words about the fact that good things as well as bad things happen in life and the majority of people are good and would never steal.
My initial reaction was to pen a thank you note and send the money back. Instead it turned into another financial lesson for Milo who was taken by the reader's kindness. Following a discussion he decided to use some of the money to buy a new wallet and is donating the rest to the Save The Children fund for the children of Haiti who lost more than just a wallet.
Children learn from good financial examples. On the other hand there are a whole heap of things parents can do to ruin their children's financial lives. Here are 10 to start with:
1. Buy your child everything they want. You may feel like you're doing your best for your child by giving them everything they ask for. The reverse is true, says family therapist and author Diane Levy. They're not learning delayed gratification. If your child wants the best scooter, the entire range of Smiggle stationery, or a mobile phone at age 10, so badly, they will learn more by saving for it.
When it comes to buying stuff for children, Ian Grant, founder of Parents Inc, always tells parents to remember: "I'm a parent first, a friend second and Father Christmas only once a year."
Instead of buying children what their friends have, use the opportunity of such a request to have a debrief session with them. Ask questions about how important the item is and why. And ask the children to use their imagination to work out ways to buy the item in question. If mine suggested off their own bat that I match their savings dollar for dollar, I'd probably agree.
2. Not letting them make mistakes. I can't tell you how many times I've told my children to look after their wallets. It wasn't until Milo lost his at McDonald's that the mistake really sunk in. Likewise, in the very early days of pocket money, I bit my tongue and let him buy plastic junk from the $2 Shop every week. He soon learned that it was better to save that $2 each week for something that provided longer-term enjoyment.
3. Living beyond your means. If the norm in your house is to buy more than you can afford that's the lesson the kids learn. Children pretty soon cotton on to the idea that parents borrow money to buy what they need - be it through credit cards, personal loans or HP. It's impossible to hide this behaviour from children.
Equally bad is showing kids that windfalls should be spent. Conversely, if you are budgeting, living within your means, creating goals and financial plans, or other good financial examples, then let your children know and show them how you do it.
4. Bribing children with money. This often happens with children of split relationships where one gives the children far more money than the other. "I have dealt with a 14-year-old who got $70 every Friday night and it affects their relationship with money as they get older," says Grant. "They also soon see through the money being showered on them and it doesn't necessarily improve their relationship with that parent." Bribery also leads children to become manipulative with money in their relationships as they get older.
5. Controlling the family trust too tightly. Chris Kelly, general counsel of the New Zealand Guardian Trust Company, says he sees all too often the controlling father who keeps a tight fist on the family business and/or trust and doesn't let his adult children learn. Then comes the day when Dad dies and the children don't know how to run the business.
In this case they often make unwise decisions because they haven't learned the right way to do things. "They think 'Dad's too careful and cautious' and they make stupid business decisions that cost money," says Kelly. "In some cases kids just blow the money. In other cases through naivety they get into bad business ventures or buy property to subdivide, but have a lack of experience to make it work."
Instead it's important for children to start sitting in on trustees' meetings in their 20s and move on to decision making once they're ready - often in their 30s.
6. Not giving pocket money. Grant says he's counselled more than one wealthy family after their teenage children have been caught shop lifting. "The parent's response is often: 'I could afford to buy the shop'." The problem, however, is that the children have never had any money of their own. This is a biggie because they don't learn the basics of allocating money for different purposes such as short-term and long-term savings.
Parenting gurus usually recommend that weekly pocket money is divided into three or more lots: for spending, saving and giving to charity. Instead of "charity" Grant has a "family tax". The children can choose to do a number of things with this including giving it to charity, spending it on others in the family or taking turns when on holiday to pay for something for the family. Should the children do a good turn for a neighbour, they may be allowed to spend a portion of their family tax.
7. Tying pocket money to work. "We think pocket money should just be pocket money," says Grant. "You do your jobs for nothing because Mum and Dad do their jobs in the house for nothing. You give the pocket money so they can learn how to husband money, not as payback for doing jobs." Not everyone agrees with this. Some think that you should only get money if you earn it. One way around this is to do both. Have a fixed pocket money and incentives to earn more.
8. Giving kids the money too soon. Where there is a large inheritance it's not a good idea to give it to children too early. In many cases, says Kelly, the children never learn to work for their money. They may not even be bothered studying at university because they've got their share of the money and don't feel the need to work.
Giving the kids large sums of money in their teens often leads to disaster, says Kelly. In their 20s it may be okay to give them the money to help them into business, or a house, but not every last cent they need if you want them to be financially self-sufficient in adulthood.
9. Holding on to money for too long. Kelly knew one family trust beneficiary who wasn't given any money until he was aged 65. It's like Prince Charles, waiting for his mother to pass on before he gets any real role in life.
Holding on to the money for too long is especially bad if the children have no idea how much they're going to inherit. That makes them frustrated and annoyed and can lead them to blame others for their financial situation in life, says Kelly.
Whatever you do with a trust it needs to be drafted very carefully. On one hand it's a good idea to be able to give capital to children if they need it to get on in life.
On the other hand you don't want the son-in-law who has grandiose plans for spending your hard-earned wealth able to access the money by putting your daughter under pressure. This can happen to sons as well, of course.
10. Giving children a depression mentality. This idea came from Parent Inc's Grant and it took me a while to get my head around it. The theory is that by saying "we can't afford it" whenever children ask for something, you're taking away hope and creativity.
They learn that anything other than functional items are unnecessary - which makes them unable to appreciate beauty such as art works or other non-essentials. It may lead to the situation in older life where items of beauty are given, but with payback at the root of the gift - which isn't good for relationships.
